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More Op-Ed Technical Analysis

More contributions from our local blog chartist. The usual disclaimers apply: this is an op-ed piece, and is not necessarily my opinion thus I offer no warranty as to its completeness, veracity or accuracy, whether explicit or implied. I am providing it for illustrative purposes only.

The following are two charts of the S&P 500 paired with the NYSE Summation Index ($NYSI). The NYSE McClellan Summation Index ($NYSI) looks at the gap between the number of advancers and decliners on the NYSE to give a net positive or negative number that indicates how overbought or oversold the market is on a given day. Using the $NYSI: The NYSI is very good at predicting the intermediate NYSE trend of about 1 - 3 months. Buy and sell signals are triggered when the $NYSI change directions or reach overbought/oversold conditions on oscillators. The charts are annotated to simplify, but basically I am comparing the daily S&P 500 charts from 2002-03 to the present-day going back to Jan. 2008. The comparison shows how similar today's chart is with the S&P500 chart of late 2002, early 2003.

There is an old investing/trading cliche': "The trend is your friend." However, that friend can come in many shapes, sizes and colors. Technical analysis is about finding the underlying trend beneath the overall market trend to provide you with an edge in the market. This chart of the S&P 500 2002- April '03, illustrates a clear technical trend in a bear market; while the S&P is below its 200-day SMA, sell when the market reaches overbought conditions. Even after a double-bottom is formed in Aug. and Oct. 2002, the technical trend gives you one more profitable trade from the short-side in late 2002, early 2003. A huge rally into the 200-day simple moving averages along with NYSI showing overbought conditions, resulted in another sell-off down to the lows. This technical trend serves you well until the S&P 500 gets above its 200-day SMA.

Cliche'/proverb #2: "The more things change, the more they remain the same" is attributable to Jean-Baptiste Alphonse Karr (1908 - 1990). However, I believe that Karr's words have been quoted by several other luminaries, from George Bernard Shaw to Winston Churchill. It seems fitting, as the same technical trend that worked in 2002, was very accurate this time around. Similar to what happened in late 2002, early 2003, the S&P500 since March 2009 has rallied bigtime into the 200-day simple moving average as the NYSE summation index ($NYSI) is showing overbought conditions. Does this mean with 100% certainty, this will result in a sell-off down to the lows...nope. You should know by now with the markets there are no absolutes; but is the technical trend still intact? Yes! Then my experience and recent history tells me there is a higher probability of a correction occuring at these levels.

Click chart to enlarge
But, but...

I know what you are thinking... 'The first chart shows the '02-03 bottom being put in, so why shouldn't I buy this next down move if it occurs?' This is where fundamentals come into play. While the charts are similar, the fundamentals of the economy and the market from the last bear market to this one are very different, so I won't assume anything until I see it happen. If the technical trend changes I will re-evaluate and wait for technical and fundamental data confirming the trend has changed. For example, Chinese stocks ($FXI) have already broken its bear market downtrend and is trading above major weekly moving averages, this is confirmed by fact that car sales in China have outpaced U.S. car sales in 2009 and in month over month sales for the last 3months for the first time ever.